Welfare Reform on the Web (August 2006): Pensions - overseas

Comparing pension promises of 30 OECD countries

M. Queisser and E. Whitehouse

International Social Security Review, vol.59, July-Sept 2006, p.49-77

This paper shows that average earners in OECD countries working in the private sector can expect a post-tax pension of just under 70% of their earnings after tax. Even the least generous countries with earnings-related schemes (the UK and the US) pay a net replacement rate of around 50% at average earnings. If this level of payment represents the lower bound of acceptable replacement rates through mandatory systems, this does not appear to leave much scope for further cuts in pension entitlements beyond the reforms that are already in place in typical OECD countries.

Demography, the cost of pensions and the move to pension funds

P. Concialdi

Review of Political Economy, vol.18, 2006, p.301-315

This article analyses the impact of so-called population ageing on the level of public pension expenditure. It provides detailed figures for all European Union member states, making a distinction between established and new members. It concludes that demographic changes will not dramatically increase the economic burden on workers of funding public pension schemes over the next 20-30 years provided that full employment can be sustained. Current moves by member states towards fully funded commercial pensions may be driven more by the need to avoid stock market collapse and by pressure from international organisations such as the World Bank than because public pension schemes are unsustainable.

Distributional impacts of pension policy in Argentina: winners and losers within and across generations

This paper constitutes one of the first attempt to comprehensively evaluate the net intra- and intergenerational transfers operated during the existence of the Argentinian pension system. The analysis shows that earlier cohorts benefited from remarkably high pension returns, because they paid contributions for relatively short periods and enjoyed the very high benefit levels characteristic of the system’s first few years of operation. Intergenerational losses are concentrated in the generations that experienced pension crisis and falling real wages. Under the reformed pension system, returns will largely depend on pension fund performance and macroeconomic stability. For workers affiliated to the public branch, internal rates of return (IRRs) are low but their benefits are defined. For those in the private branch, IRRs could be higher but there is uncertainty over the future value of benefits and the impact of underperformance by pension fund administrators. Pension policy has also tended to produce intergenerational redistribution from high to low-income workers included in the system as a result of progressive benefit formulas.

From work to retirement: a tale of bumpy routes

B. Contini and R. Leombruni

Review of Political Economy, vol.18, 2006, p.359-378

Most public sector employees in Italy and those employed in large private companies who have benefited from secure, steady jobs over their working lives experience a smooth transition into retirement. However workers in small and medium-sized enterprises and those who have experienced spells of unemployment, especially towards the end of their careers, are disadvantaged with regard to both wages and pensions. The article calls for moves to extend working lives and improve the employability of older workers.

Pay-as-you-go versus funded systems: some critical considerations

E. Febrero and M.-A. Cadarso

Review of Political Economy, vol.18, 2006, p.335-357

Longer life expectancy and lower fertility rates will lead to an ageing population in most Western countries. It is often maintained that this will make earnings-based, defined-benefit pay-as-you-go pension schemes unsustainable in the near future. Some economists suggest shifting towards a funded system on the grounds that: 1) it raises national saving, thus leading to a faster rate of accumulation and a higher per capita income; 2) it offers a higher rate of return on savings; and 3) it is immune to demographic shifts. This article explores the theoretical basis of these supposed advantages and finds it weak.

Politics within paths: trajectories of Danish and Swedish earnings-related pensions

C. Green-Pedersen and A. Lindbom

Journal of European Social Policy, vol.16, 2006, p.245-258

This article looks at so-called second-tier pension schemes in Denmark and Sweden (i.e. earnings-related schemes which top up basic pensions). In he late 1950s, both countries had universal basic pensions, but chose different paths with regard to second-tier schemes. Sweden chose the pay-as-you-go (PAYGO) path, while Denmark ended up on a funded path with occupational schemes. Once set on a path it is very difficult for a country to change direction. Changing from a PAYGO to a funded system means that the current generation of workers has to fund the pensions of existing retirees, while saving for their own retirement. Changing from a funded to a PAYGO system means that current workers both benefit from their savings and receive a free additional pension paid for by taxing their successors. This article explores how these dilemmas affected the pension reform process in both countries.

The “principle of scarcity”, pension policy and growth

M. Pivetti

Review of Political Economy, vol.18, 2006, p.379-390

According to the principle of scarcity, public pensions must be reduced in the face of population ageing if the economic welfare of the community as a whole is to be maintained. The author argues that, on the contrary, generous retirement pensions for the elderly maintain their purchasing power after retirement and so encourage full employment and economic growth. He concludes by looking at some of the obstacles to the implementation of such as system at the present time.

Private and public pension systems compared: an evaluation of the Latin American experience

C. Mesa-Lago

Review of Political Economy, vol.18, 2006, p.317-334

This article compares the performance of private pensions systems in 10 countries with that of public systems in eight countries based on nine indicators: labour force coverage; retirement ages and pension levels; gender equality; administrative costs; wage contributions; compliance; portfolio diversification in investment of pension funds; rates of return on investments; and financial equilibrium. Contrary to received wisdom, the research shows that public systems perform better than private ones on most indicators.

Social security in an ageing society

L.R. Wray

Review of Political Economy, vol.18, 2006, p.391-411

It has been claimed that Social Security (the US public pension system) is unsustainable due to the impact of population ageing. However, this article suggests that the impact of the rise in the numbers of retired people relative to numbers of productive workers has been exaggerated. Overall, productive workers will have fewer dependents (aged and young) than in 1965 because of falling birth rates. Once the baby boomer generation has passed on, demographic changes will be too small and too slow to induce a crisis in the public pension system provided that relatively modest productivity increases are achieved.

Transformations in economic security during old age in Korea: the implications for public pension reform

Y.-J. Choi

Aging and Society, vol.26, 2006, p.549-565

The South Korean national pension scheme was introduced in 1988 and now covers all private sector employees and the self-employed. However there is now concern about its financial sustainability in the face of population ageing which has led to calls for its “downsizing”. However, the material insecurity of older people is being exacerbated by labour market changes and by the erosion of family support. There is now significant under-employment among people of working age, which means that they are not accumulating the work-related resources and entitlements needed to ensure financial security in old age. Falling birth rates and increased longevity also mean that the tradition of children supporting their elderly parents is becoming unsustainable.